About the author

James Pethokoukis is a columnist and blogger at the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews, the opinion and commentary wing of Thomson Reuters.

The American middle class is absolutely better off now than it was decades ago

I wanted to highlight another bit from my recent interview with Bruce Meyer, a visiting scholar here at AEI and a professor at the University of Chicago’s Harris School of Public Policy, on inequality and poverty.

In this exchange, we discuss whether US living standards have really been stagnant for decades as some researchers claim:

Pethokoukis: When people talk about inequality, usually in the next breath they’ll say, “Listen, that top 1% is now getting a lot of the income, and at the same time, incomes for the middle class have been stagnant for 30, 40, maybe 50 years.” Those two facts are used together, I think, to show a relationship between the two. Is that right? Because to me it seems intuitively, how could that possibly be right that the median American is no better off than he was sometime in the 1960s?

Meyer: I think you’re right to not believe it, I think that statistic is wrong. If you look at the consumption of the median household, it’s gone up a lot over the last 30 years. Part of the explanation for the difference between what I am saying and some of the conventional statistics that you might see from the census bureau is that we often use a way of adjusting for price changes that overstates the extent of inflation. So it makes it look like we are not doing well in the middle of the distribution even when we are.

There are very tangible things that you can look at to see that people in the middle of the distribution are better off than they were 20, 30 years ago. For example, if you look at the share of people in the middle of the income distribution that have central air conditioning, or maybe only a couple of room air conditioners, or have a dishwasher, or a washer and a dryer in their house or apartment — those numbers for the middle look like the numbers for the top 20% as of 20 or 30 years ago. So there’s been quite dramatic improvements if you look at tangible things like what kinds of appliances have in the house. You can also look at the size of people’s houses or apartments — square footage, number of rooms — those things have gone up quite sharply for people in the middle of the distribution.

So if we’re looking at how people are doing on a pre-tax basis, how we measure inflation is very relevant. But do those income numbers include everything?

Well, when you talk about the broader income distribution, particularly those at the bottom, it’s very important to pay attention to taxes, and in-kind transfers, and to the fact that our income data sources tend to undercount a lot of key transfers from the government. Much of what we have done over the past 20 or 30 years to help those at the bottom of the income distribution has been in the form of tax credits, like the Earned Income Tax Credit, or transfers that are in-kind like food stamps, which we now call SNAP, or housing benefits, or Medicaid. And those benefits are not counted in our official income or poverty statistics. Omitting those leads to a huge understatement of the resources available to those at the bottom of the distribution.

So if we were sitting here right now, and we had someone who’s an inequality researcher who focuses a lot on income inequality and does not focus on the consumption numbers, what would they say? Because if you read about these stories in The New York Times, you hear far more about the inequality of income than consumption.

So, economists are pretty much united that, in principle, consumption is a much better way to measure people’s well-being, and the resources that are available to them, than income. And that’s because income varies quite a bit over time when people take time off to go to school, when they are between jobs — it varies a lot for transitory reasons, while consumption is more of a long-term measure of a household’s well-being. It captures the fact that people are able to save for a rainy day. When properly measured, it accounts for the fact that if you already own a house, you own a car or two, you get a flow of resources from owning those.

So, you can take the case of a retired couple: They may not have much in a way of income, but they may be drawing down their savings, they may already own a car or two. So, they don’t have to spend much to live at a very high level, and they don’t have to have an income because they are able to draw down what they’ve earned over their lifetime.

Discussion:
(6 comments)

Appliances and cars have certainly improved and become cheaper but college education has become much more expensive. College education means more productive employment and careers. Better appliances don’t make that kind of difference.

Even better cars are problematic. Years ago you could fix your own car. It’s much harder to do that now.

Even if what he says is true there is still the stark difference between the power of the 1% and the power of the poor and middle class. We are about where we were before the great depression.

Of course he’s correct. Larry is a victim of his need to be “entertained to death”. We are moved by those who would feed us tidbits of misinformation that feed into our needs for excitement whether it depresses us or raises up our spirits. But it’s easier to tickle our fears.

In my opinion consumption is the wrong measure. Net worth is the proper measure; the higher consumption has been financed with higher levels of debt. Net worth for middle class individuals has been stagnant or declining. I would venture a guess that for the nation as a whole the net worth has also declined if you consider all the increased debt loads at all levels of government. Only an increase in production can bring any increase in wealth.